Rent-to-own homes make sense for people who are unable to save enough money for a down payment or who cannot qualify for a mortgage. These arrangements typically allow renters to build up equity in the property by paying a higher rent each month that includes an option fee and/or a percentage of the future purchase price.
It’s a great way to save for a down payment
The rent-to-own option allows tenants to build up equity in a house they’ll eventually own. Typically, a portion of the tenant’s monthly payment will go toward the home purchase.
Tenants that are struggling to save for a down payment will be happy to know that some or all of their rent payments will be applied toward the eventual purchase price of the property. The lease agreement will spell out how this works, so read it carefully to avoid surprises.
A potential home buyer might find that a rent-to-own arrangement will allow them to build credit, improve their financial situation, and make themselves more attractive to mortgage lenders by the end of the leasing period. In addition, the ability to lock in a purchase price early on can be beneficial if the housing market is rising. When the lease term comes to an end, the tenant can choose to buy the home or move on to another one. I recommend this website for more how does rent to own work.
It’s a great way to build credit
Often, rent-to-own agreements include an option to purchase at the end of the lease. This can be a great option for those with imperfect credit who are trying to build up their score and repair their financial profile before applying for a mortgage. However, it is important to carefully review the contract before signing to be sure the purchase price and other terms are fair. A mortgage lender can’t lend more than a home is worth, so if the purchase price is too high, you could be stuck with an expensive investment that you don’t really want.
Also, if you decide you’re not ready to buy the home at the end of your lease, you’ll likely lose the down payment you’ve built up. This can be a costly mistake, especially if you need that money for other expenses or if the home values go down in the future. It’s best to consult a real estate attorney or an expert in the area before entering into this kind of agreement.
It’s a great way to test the market
Owning a home is often considered the ultimate goal of many renters, but it’s also a major undertaking that can take years of scrimping and saving to squirrel away a down payment and carefully spending and bill paying to keep one’s credit score high. Rent to own homes may offer a way for would-be buyers to test the market without taking on the full burden of mortgage payments, insurance, maintenance, and other costs.
Rent-to-own agreements are generally more expensive than traditional rental prices because a portion of the monthly rent is typically credited toward the eventual purchase price of the property. However, as with any rental agreement, tenants should be clear about their responsibilities regarding maintenance and repair, and the role of their landlord.
Fuller says that a homeowner in a hurry to sell will probably be less willing to enter into a rent-to-own agreement with a buyer, as it takes more time to negotiate and close a sale. But, she adds, a motivated seller might work with a prospective buyer on a rent-to-own agreement if they’re willing to make concessions on price or other terms.
It’s a great way to avoid foreclosure
Tenant/buyers who have poor credit find themselves drawn to rent-to-own properties since the leasing period gives them a chance to repair their financial profile and secure a mortgage. The lease-purchase agreement also allows them to “lock in” a market rate for their future home purchase.
But it’s not without its risks. For one, you’ll probably pay a nonrefundable upfront fee that doesn’t count toward your rent or down payment, and the seller may require you to pay additional fees for maintenance and repairs.
You’ll also want to treat the property like a typical home purchase, which means getting a professional home inspection and doing a title search. And don’t forget to shop around for a mortgage just as you would for a home. Different lenders quote different mortgage rates and closing costs, so you could save thousands by taking the time to compare options. This is especially important in a buyer’s market. Homeowners may be willing to offer a better deal in exchange for a larger pool of prospective tenants.